Purpose of Economics and Price Mechanisms

Purpose of Economics and Price MechanismsTask 1 look scotchs, the purpose of its activities and identify scotch problem.Economic system is a system aim for producing, distri buting and consuming goods and services. It includes the combination of the various institutions, agencies, consumers, entities that comprise the economic structure of a given society or community. Further more(prenominal), it likewise includes how these agencies and institutions ar related to each otherwise(a), how information flows among them and the social relations deep down the system which including home corrects and the structure of focussing. The mode of mathematical product give be the related concept.E very economic system provides solutions to quaternary questions what goods and services forget be produced how they solelyow for be produced for whom they exit be produced and how they all(prenominal)ow for be allocated in the midst of consumption (for commit use) and coronation ( for future use). In a devolved economic system, these questions ar resolved. This lead to economic coordination to achieved through the legal injury mechanism(Elton, 2014).The basic economic problem is about scarcity and choice since at that place argon only(prenominal) a limited cadence of imagerys avail equal to(p) to produce the unmeasured amount of goods and services which human, people wants and needs. Because of scarcity, various economic decisions moldiness be make to allocate re antecedents efficiently.ResourcesA resource is a operator of place upright in like manner fucking be regarded as any feature of our environment that helps to support our well being. in that location are three main types of resourceThe basic Physical or natural resource such(prenominal) as oil, climate, water, minerals, fo lie downs and fisheries.The second human resource peoples and their various skills. The third gear man made resources e.g. machines, equipments.ScarcityScarcity stern be broken down into four key ingredients of factors of productionLand Land includes all natural resources. bray Labour includes all physical and mental effort.Capital Capital includes machinery and other items that go into further production.Enterprise enterprise is the art of combining the other three factors in the production process.Scarce goods and servicesAs nones above, if did non exist, all goods and services would be giving. A good is considered strange if it has a non-zero toll to consume costs whatsoeverthing and is scarce. By consuming one good, some other good is foregone. Therefore decisions and trade-offs to be made.(T.Ming, 2014,)The cost of a food is a signal of its scarcity. One good maybe more scare than other, either because of limited resources or higher want ( charterment) for that good.ChoiceBecause resources are scarce and most of our wants are extensive, a choice has to be made about how to use scare resources in the outmatch way. Based on the choice, the highest-value alternative exit be forgone and this is called chance cost. This rule applies to organisations, society as a whole, and to individuals.Choice and luck costChoice and opportunity cost are two fundamental concepts in economics. Given that resources are limited, producers and consumers consent to make choices amongst competing alternatives. All economic decisions involve making choices. Individuals essential choose how best to use their skill and effort, firms must choose how best to use their workers and machinery, and g overnments must choose how to use tax tolerateers silver. Making an economic choice creates a sacrifice because alternatives must be given up, which results in the loss of benefit that the alternative would urinate provided. Similarly, land and other resources, which withstand been employ to build a new school could seduce been use to build a new factory. The loss of thenext best woof represents the real sacrifice and is r eferred to asopportunity cost. The opportunity cost of choosing the school is the loss of the factory, and what could rich person been produced.It is necessary to appreciate that opportunity cost relates to the loss of the next best alternative, and non just any alternative. The true cost of any decision is always the closest option not chosen. (Bong, 2014)Define the theory of price mechanism by spell metalworker and illustrate by examples(s) to supports yours answer with relevant leaves.Adam Smith is one of the Founding Fathers of economics described the invisible hand of the price mechanism in which the hidden-hand of the commercialise operating in a private-enterprise(a) market through the pursuit of self- hobby allocated resources in societys best interest. It was the notion of the invisible hand that enabled Adam Smith to civilize the jump comprehensive theory of the economy as an interrelated social system. (Tay, 2014)In common, the concept is composed of three logical stepsThe first is the observation that human action often leads to consequences that were unintended and unforeseen by the actors. The second step is the argument that the sum of these unintended consequences over a wide number of individuals or over a farseeing boundary of time may, given the right circumstances, result in an swan that is intelligible to the human mind and appears as if it were the product of some intelligent planner. The third and final step is the judgments that the overall order is beneficial to the participants in the order in ways that they did not intend but nevertheless find desirable.The price mechanism performs three main functionsRationingThe aim is to circumscribe scare resources when demand in market outstrips supply. When at that place is a famine of a good, the price is bid up, leaving only those with the volitioningness and ability to digest to purchase the product. This bottom causes supply and demand to reach equilibrium of demand and su pply.Signaling functionThey adjust to demonstrate where resources are required or not, via a change in demand.For example, the price of goods which are scarce will increase. This increase in price should provide an incentive for producers to increase production of the good so that buns meet the demand.Transmission of preferencesConsumers are able to alert producers to changes the nature in wants and needs through their choices so that the market provides the right amount of the right goods. When demand is weaker, then the supply will contracts as the producers cut cover version on output.Task 2 localize factors affecting the economics of an organization.There are few types of competition in billet. They are perfect competition, imperfect competition, and monopolistic competition.Perfect competitionIt is a low barrier to entry, many another(prenominal) choices by consumers, and no worry has supremacy. It means that many companies competing and nobody has a straightforward lead. For examples, restaurants, grocery stores, barbers shop, shopping mall, master key services such as dentist, doctor, contractor and others. It is a theoretical assert in which not only single buyer or vendor has mold over the any products sold in the market. Sellers are free people to enter the market to dole out any product and buyers are free to purchase any product wanted. A large number of producers and sellers check in the perfect competitive market, and the products sold by one producer are easily replaced by a similar product from another producer. Prices for goods or services would be established by the rate in majority of consumers are willing to pay and producers will adjusting the productivity to proportion with the price. (ReemHeakal, 2014)Imperfect competitionIt describes a market where many firms offer variations of the same product or multiple products are offered with differences. The difference may be differs in quality, preference, durability, price or uti lity. However, firm will be coerce to departure the market if their products are not purchase by consumers. For example, a hair style cutting may be assisted by more than numbers of barber shops which all differing in style, price and environment. Consumers are bound only by personal preference and affordability in choosing a barber shop. (Hans, 2014)Monopolistic competitionThe sellers feel they do have some competition. There is one big society dominating the market with a few long suit or smaller sized companies.Identify source of pay.Source of paySome sources of pay areshort barrierand must be throw outful top inside a year. Other sources of pay arelong end pointand stand be remunerative back over many years.Venture neat provides long-term, apply share capital to help unquoted companies grow and succeed. Obtaining judge capital is importantly different from height debt or a lend from a lender. The lenders have a legal right to interest on a bring and redefraym ent of the capital depends on the business line weather success or failure. Venture capital is the money put into an enterprise which may all be lost if the enterprise fails. A businessman starting up a new business will invest contingency capital of his own, but he will probably need extra backup from other source, and can be very successful if he gets very high profits and a substantial return on the investment. However, there must be a very high risk of losing the investment and it will take some times to get the return and profits. A venture capitalist will require a high adieu judgment rate of return on investments, to recompense for the high risk.Internal sourcesof finance are bills found inside the business. For example, profits can be kept back to finance expanding upon. Alternatively the business can sell summations that are no longer really needed to free up gold.Internal Sources of finance and maturementIt doctord as organic fruit which is the growth generate d through the development and expansion of the business itself. An organic growth can be achieved through generating increasing sales which increase income to influence on overall profit levels. Besides that, it can be apply of retained profit which used to reinvest in the business. Other than that, the federation also can sale their asset which can be a parallel edged sword so that it can reduce the capacity.External sourcesof finance are found outside the business, eg fromcreditorsor banks.External Sources of finance and growthThis can be categorizing into 3 chemical groups which are long term, short term, and inorganic growth. pine term may be paid back after many years or not to be paid. Short term is used to cover variations in cash flow. The growth which generated by gaining is used to define inorganic growth. In long term, there are shares and loans can be practice.Long termThere are few types of shares in long term shares which are so-so(predicate) shares, preference s hares, new share issues, rights issue and bonus or scrip issue.Ordinary shares (Equities)Ordinary shootholders have the voting to rights in making any decision for companys benefits. The dividend can be differing according to their contribution and share capital. Last to be paid back in event of collapse. They share the price varies with trade on declension exchange.Preference shareThe shareholders will be paid sooner ordinary shareholders. They have the fixed in return. It is cumulative preference shareholders which have the right to dividend carried over to next year in event of non-payment.Rights issueThe present shareholders are given discount on buying new shares.Bonus or scrip issue- It is the change to the share structure which increase number of shares and reduces value but market capitalization will roost the same.There are few types of loan in long term loan which are Debentures, bank loans and mortgages, merchandiser or investment banks, and government.DebenturesIt h as the fixed in rate of return which first to be paid.Bank loans and mortgages- It is suitable for small to medium sized of corporation where property or some other asset acts as security for the loan.merchant or Investment BanksIt act depends on clients to organize and underwrite raising finance.Short termThere are some categories in 5 groups including bank loans, overdraft facilities, trade credit, factoring and leasing.Bank loansIt has the necessity of paying interest on the payment. The periods of payment is generally from one year then not longer than ten years.Overdraft facilitiesIt is the right to be able to withdraw funds that do not currently have. It provides flexibility for a firm. The interest only paid on the amount been overdrawn. There is an overdraft limit which is the maximum amount allowed to be drawn.Trade creditIt can help the ease of cash flow which commonly can be paid within 90 days.FactoringIt is about the sale of debt to a specialist firm who reliables paym ent and charges a commission for the services.LeasingThe used of capital can be obtain without the ownership. It is effectively a hire agreement.Inorganic growthIt is about achievement. The components to gain the external finance of inorganic growth are merger and also takeover.MergerThe Company agrees to join together which both can remain some of the identity form.TakeoverThe firm will be secure control by the other, the firm taken over most probability will lose its identity.Task 3Identify and describe types of finance sources which available for the said projects.On my opinion, this company should base on medium and long terms sources of finance. Medium term sources are usually repaid between 1 5 years. Some sources of finance areshort termand must be paid back within a year. Short term sources are repaid within one tear. Other sources of finance arelong termand can be paid back over many years. Long term sources are usually repaid between 5 20 years.Medium termHire purchase It involves buy an asset paying for it over a period of time. Usually a percentage of the price is paid as down payment and the rest is paid in installments for the period of time concur upon. The business has to pay an interest on these installments.LeasingLeasing involves using an asset, but the ownership does not pass to the user. Business can lease a building or machinery and a periodic payment is made as rent, till the time the business uses the assets. The business does not need to purchase the asset.AdvantageDisadvantageThe business can benefit from the asset without purchasing it.Usually the maintenance of the asset is done by the leasing firm.The total cost of leasing may end up higher than the purchasing of assetMedium term loansThe business borrows an agreed amount, which is advanced at the start of the loan. A repayment schedule between one and five years is agreed. Interest is charged in imbibe with general interest rates and the category of the borrower is taken int o consideration. The business will normally have to provide security for the loan but, with the cash raised, they can avail of cash discounts when buying assets.LeasingThis form of finance allows a business to use an asset without having to raise the full price. In essence, the business rents the asset from a fiscal institution. The advantage to the business is that it allows the business claim a tax deduction for the full leasing payments over the life of the lease. The downside is that the asset is not owned unless the business decides to buy out the lease. Leasing is appropriate for IT equipment, which may have to be changed every two to three yearsLong termOrdinary sharesmay be issued to finance a major expansion such as the building of a factory overseas. The board of directors must persuade the existing shareholders or attract investors to subscribe to the new issue. The shareholders will pay a dividend and a capital gain on their investment. The proposed expansion must ther efore be profitable or else the investors will be dis institute.well-kept earningsare profits, which are ploughed back into the business to create growth. This form of finance is suitable for organic growth as the pace of the expansion can be matched to the funds available. The shareholders have to give up some or all of their dividends but, if growth is a success, the value of their shares will increase.Long-term loansare borrowed from pecuniary institutions and must be repaid with interest within five to twenty years. If repayments can be met, borrowing allows the business to grow without introducing any new owners who would have a share of all future profits. Dunes Stores, one of Irelands leading retail chains, remains a private company and does not look for shareholder funds when expanding. Instead it uses borrowings and retained earnings. This means that a small family group retain absolute control of the business.Venture capitala special type of financial institution has been formed to help firms grow. Venture capital companies provide money for a limited period of time, usually in the form of a minority lawfulness stake. It is hoped that at the end of this time the company will have grown large enough to achieve a stock exchange quotation. This allows the venture capital company to sell its shares for a large profit.Propose a financing source which is suitable for given project. relinquish the reason of the chosen option.Some sources of finance are medium term and must be paid back within 5 10 years. Other sources of finance arelong termand can be paid back over many years. Long term sources are usually repaid between 5 20 years.Long termThe term venture capital is more specifically associated with putt money, usually in return for an equity stake, into a new business, a management buy-out or a major expansion scheme.The institution that puts in the money recognizes the gamble inherent in the funding. There is a serious risk of losing the entire in vestment, and it might take a long time before any profits and returns materialize. But there is also the prospect of very high profits and a substantial return on the investment. A venture capitalist will require a high expected rate of return on investments, to renovate for the high risk.A venture capital organization will not want to retain its investment in a business indefinitely, and when it considers putting money into a business venture, it will also consider its exit, that is, how it will be able to pull out of the business eventually and put one across its profits. Examples of venture capital organizations are Merchant Bank of Central Africa Ltd and Anglo American Corporation Services Ltd.When a companys directors look for help from a venture capital institution, they must recognize thatThe institution will want an equity stake in the company.It will need convincing that the company can be successful.It may want to have a representative appointed to the companys board, t o look after its interests.The directors of the company must then contact venture capital organisations, to try and find one or more which would be willing to offer finance. A venture capital organisation will only give funds to a company that it believes can succeed, and before it will make any definite offer, it will want from the company managementA business planDetails of how much finance is needed and how it will be usedThe most recent commerce figures of the company, a balance sheet, a cash flow apprehendA profit forecastDetails of the management team, with evidence of a wide range of management skillsDetails of major shareholdersDetails of the companys current banking arrangements and any other sources of financeAny sales literature or publicity material that the company has issued.A high percentage of requests for venture capital are rejected on an initial screening, and only a small percentage of all requests survive both this screening and further investigation and result in actual investments.1